NEW YORK (Reuters) - The U.S. dollar fell on Wednesday to its lowest in about a month against a basket of major currencies, on doubts over whether the U.S. Federal Reserve will raise interest rates in September given China's devaluation of the yuan.
The euro hit its highest level against the greenback in about a month at $1.11920 after China's central bank set its daily mid-point reference at 6.3306, even weaker than Tuesday's devaluation.
The euro rose against the dollar on worries that China's actions, and the ensuing market volatility, could prompt the Fed to avoid increasing rates next month. The dollar stands to benefit from the Fed's first rate increases in nearly a decade since they are expected to drive investment flows into the United States.
"China is still a big unknown, and the market is pricing in the worst," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York. "Many people in the market think that there's less chance of a September hike, and that's one of the factors that has helped lift the euro."
Analysts also said that traders, aiming to reduce risky bets, repurchased the euro after "shorting" or betting against the currency, which in turn drove the euro higher.
"Now that traders have been a little bit overexposed on the short side for the euro, they're going to take some chips off the table," said Axel Merk, president and chief investment officer of Palo Alto, California-based Merk Investments.
The PBOC surprised markets on Tuesday by aggressively lowering its guidance rate, pushing the yuan down nearly 2 percent.
The Aussie, widely considered a more liquid proxy for China plays, AUD=D4 was last up 0.71 percent against the dollar at $0.7353, after plunging to $0.7217, its lowest since mid-2009. The New Zealand dollar was last up 1.15 percent against the dollar at $0.6608, after hitting a six-year low of $0.6468 NZD=D4.
The euro was up 1.25 percent against the dollar at $1.11810 EUR=EBS. The dollar was last down 0.92 percent against the Japanese yen at 124 yen JPY=EBS. The dollar was last down 1.83 percent against the Swiss franc at 0.97050 franc CHF=EBS.
Reporting by Sam Forgione; Additional reporting by Anirban Nag in London; Editing by Frances Kerry